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Asked 10/30/2009
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401-k loan default I took a loan out of my 401-k inMay of 2008.Imade payments till October when i went on dissability. Now loan in default and i never planed for any of tnis. I was approved for Social Security since April 2009. Any chance i wont have to pay the 10 percent penality? |
Answer 1/2 - Submitted 10/30/2009
You will have to pay the 10 percent penalty.
When you defaulted on the 401k loan, it became an early distribution. Since you got the loan before you became disabled, you will probably not be able to retroactively turn it into a hardship medical withdrawal. You can try arguing that the loan was a hardship medical withdrawal, but it is very unlikely that the IRS will agree with you, so you will most likely have to pay the 10% penalty in addition to all regular income tax on the amount withdrawn.
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